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Demystifying private capital funds

15 December 2022

Liam McHugh

Managing Director, European Fund Administration, CSC

Liam McHugh

Managing Director, European Fund Administration, CSC

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As private capital attracts a wider investor base, which fund structures are the most popular and appropriate?

Against a backdrop of high-interest rates and low growth, alternative assets can provide investors with steady long-term returns and a stable home for capital.

Activity in the private equity space may be slowing, but private credit and real estate remain buoyant. As we move into the next economic cycle, distressed funds are anticipated to flourish.

Alternatives can be complex assets, and managers moving into these areas or expanding their allocations need to be cognisant of tax, regulatory and legal requirements, investor demands and compliance obligations.

With that in mind, which structures are managers using to meet their growing needs? And what makes the most sense as private capital targets a wider investor base?

This was the starting point for our latest #PrivateFundsIndustryLIVE event: Demystifying Private Capital Funds.

We were joined by Lindsay Trapp, Partner at Dechert LLP, and Liam McHugh, Managing Director of European Fund Administration at CSC. The event was chaired by Colin Leopold, Head of Research and Insight at Global Fund Media.

The retailisation of private capital

One of the key themes of the discussion was the continued retailisation of private capital and the most appropriate structures for targeting this investor base.

Trapp described the situation in the US, where the popularity of business development companies (BDCs) is testament to the retailisation trend, providing a gateway to credit and distressed investing for non-institutional investors, she explained.

Much of the focus in the US, she added, is on dealing with tax concerns around direct lending. BDCs’ status as regulated investment companies (RICs) make them attractive, and their relative transparency offers comfort to retail investors.


In Europe, Luxembourg’s special limited partnerships (SCSp) and Ireland’s investment limited partnerships (ILPs) perform similar roles. Both these structures have the advantages of simplicity, transparency and legal protection, making them attractive to a broader investor base.

McHugh said the ILP, which came into being in 2021 could see real momentum in 2023.

He also pointed to the great success of the variable capital company (VCC) in Singapore, which can also be offered to retail investors. Over a thousand VCCs have been registered since the structure’s introduction at the start of 2020.

The same success has eluded the EU’s European long-term investment fund (ELTIF), introduced in 2015.

Its aim – of creating a long-term investment culture among both professional and retail investors – was hindered by complex rules and a lack of tax incentives. That is now under review and new rules are expected next year.

The evolution of ELTIF is worth watching. It’s a work in progress and may lead to a greater uptake in 2023.

Both Trapp and McHugh have seen continued growth in the creation of parallel funds, with US managers launching European structures to attract European investors or house assets on the continent.

Managing liquidity in private capital

Another key trend identified in the discussion was the challenge of liquidity management.

Trapp explained that this is a particular issue for hybrid funds, but also more generally as economic headwinds gather.

“It’s a key factor for both investors and managers,” she said. “Fund prospectuses should make sure they give clarity on redemption policies and gate clauses.”

General partners are using provisions around gating and longer lockup periods to ensure healthy levels of liquidity. Some funds are attempting liquidity matching.

But Trapp added that no one-size-fits-all solution to liquidity management is possible because each hybrid fund is unique.

An intriguing year ahead

Both experts agreed that new investors are moving en masse to alternatives, regardless of the structure in use.

This significant movement of capital offers opportunities – but also challenges. In the US, McHugh said, increased regulation is expected in private market funds.

In Europe, ESG requirements and potentially new AIFMD II rules will place an additional burden on managers.

These challenges are significant, but the overall impression from this illuminating session was of a sector in relatively good health.

As the economy tightens, we can expect to see a more concerted push towards the retailisation of private capital in 2023, and a corresponding uptick in the use of structures that facilitate it.

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